Why does Latin America and the Caribbean need to discuss about Proptech?
By Guillermo Mulville From IDB Invest
Our region has the highest share of city-dwellers in the world. Considering the lack of transparency in contracts, high transaction costs, scarce mortgage financing, high landlord requirements, and other hurdles, it is not surprising that “property tech” or proptech is taking off in LAC.
Real estate is the world’s largest asset class, valued at almost $300 trillion in 2017. It is largely fragmented, inefficient and with entrenched incumbents. Sooner or later, most industries with these features get disrupted, and the culprit is always “data”.
The vast amount of data being generated, analyzed and applied to real estate, are producing a digital transformation in the property sector. Information and communication technology (ICT) applications, fueled by data, help reduce information asymmetry, provide transparency, and overall contribute towards more efficient markets. In real estate, this trend is enabled by a wide array of converging technologies: mobile, broadband, cloud, big data, artificial intelligence (AI), Internet of Things (IoT), blockchain, 3D printing, and others.
Real estate has a complex lifecycle with several stages. These include land appraisal, acquisition and permits, construction, purchase, sales and leasing, refurbishment, investment and financing. To describe all the technology-enabled business models and tools that are transforming these different phases, the term “proptech” (property + tech) has been recently coined; to some degree it’s still somewhat diffuse and expanding. At its core, proptech embodies the transactional side of the property industry, and at its extremes touches on fintechs, construction technology and smart cities.
Proptech business models
Proptech business models are best illustrated through its sectorial champions, which include:
- Trulia and Zillow, which took an early lead in providing transparency through the online publishing of numerous highly relevant property data points.
- Redfin, which disrupted real estate commissions.
- Opendoor, a so-called i-buyer which use data modelling technics to detect purchase opportunities which it undertakes itself, to then flip the property to the ultimate buyer. This addresses the liquidity gap prevalent in real estate transactions by satisfying the needs of those sellers that value certainty and speed.
- Flip, a platform which allows renters to sublease their properties, in the process vetting applicants and dealing with the paperwork.
- Quicken Loans, which acquired Rocket Mortgage, became the largest overall property retail lender thanks largely to its use of online applications, in contrast to owning expensive branch networks. Intermediation costs clearly decline thanks to a digital distribution of lending products.
- Lemonade, an “insuretech” which offers affordable homeowner’s and renter’s insurance through a transparent and speedy AI-based system.
- ParkJockey, an integrated parking solution which allows drivers to find spots and book them on the mobile app.
But why is proptech relevant for LAC?
The region has the highest share of city-dwellers in the world. It also shows high population growth, which results in deep urbanization constraints. 86 million households (25 percent of LAC’s urban population) reside in informal neighborhoods lacking basic services and land tenure rights, while 55 million households show “some kind of deficit”, according to IDB research.
Considering the lack of transparency, high transaction costs, scarce mortgage financing, high landlord requirements, and other hurdles, it is not surprising thatproptech is taking off in LAC. The region’s entrepreneurial flair has triggered innovation, but also helped “tropicalize” solutions seen elsewhere. According to market analysts, there are 350 proptech companies in LAC, with Brazil leading the pack, followed by Mexico. Approximately half of these target commercial real estate, with the balance aiming at the residential sector.
Again, the business models are best explained by those start-ups which have gathered market momentum and raised smart capital, including:
- Quinto Andar (Brazil), which frees the renters from providing guarantees. The company digitized the different stages of the rental process, from electronic signatures to contract management and payments. It also provides the landlord with liquidity in case of rental payment delays.Homie (Mexico) follows a similar business model.
- Loft (Brazil), a marketplace that also plays as an i-buyer. In many cases, it also refurbishes and decorates the property to make it immediately “livable”.
- Creditas (Brazil), a consumer and SME-lending fintech, grew rapidly partly by collateralizing previously unencumbered real estate. Unlocking real estate value allows for higher credit availability, larger loan sizes and lower default rates. Even in cash strapped Argentina, Agilis offers up to 10-year terms for general purpose loans secured by real estate assets.
- Bricksave, with operations in Argentina, has jumped onto the crowdfunding wagon by democratizing the access of retail investors to internationally diversified real estate portfolios.
Follow the proptech money
When the opportunity is good, smart money follows. Proptech has been attracting the attention of the savviest international and local investors. Among the most prolific is SoftBank, which has invested in WeWork, Opendoor, Compass, Clutter, View, Katerra and Fortress. In LAC, it recently made a $250 million investment in Quinto Andar, together with Dragoneer, Kaszek and others. Loft, on the other hand, has raised close to $90 million through heavyweights such as Andreesen Horowitz, Monashees, QED and Valor Capital. And last month, Flat and OpenCasa, two i-Buyers, raised equity and debt.
Development finance institutions are also starting to venture into the space, especially since adequate and affordable housing helps to diminish fragmentation and inequalities, which are key to the 2030 Agenda for Sustainable Development and the New Urban Agenda. Designing holistic urbanization models and encouraging innovative and inclusive financial solutions are also critical to SDG 11 (Sustainable Cities and Communities).
All indicators show the pace of innovation in the real estate value chain is accelerating. While rumors of traditional real estate players disappearing may be greatly exaggerated, it is also likely that your next property transaction will be smoother, cheaper and more digitized.■
For more on this story go to; https://blogs.iadb.org/bidinvest/en/why-does-latin-america-and-the-caribbean-need-to-discuss-about-proptech/